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Lloyd Mexico Economic Report - July 2001

Table of Contents

INTEREST RATES AT SEVEN-YEAR LOW
BANK SOLD FOR 12.5 BILLION DOLLARS
BIO-PIRACY
ING BUYS INSURANCE GROUP
THE SOFT DRINKS INDUSTRY - A SPECIAL REPORT

THE DOMINANCE OF COCA-COLA
LARGEST CONSUMERS PER CAPITA
CONSOLIDATION AMONG COCA-COLA BOTTLERS
PEPSICO DISTRIBUTORS CONSOLIDATE, TOO
SWEETENED WITH FRUCTOSE OR SUGAR

REDUCED INFLATION
GRAPE COMPLAINT REJECTED
INCREASED FOREIGN INVESTMENT
NEW AIRLINE TAKES TO THE SKIES
ANOTHER MILESTONE FOR LLOYD FUNDS

INTEREST RATES AT SEVEN-YEAR LOW

Benchmark 28-day Treasury bill (Cetes) interest rates fell to 10.21% last month, a seven-year low. Banks responded by lowering their rates for auto loans and property mortgages. Banamex and Serfin were quick to match the cut in rates offered by Scotiabank Inverlat, the Mexican unit of Canada's Bank of Novia Scotia. Scotiabank Inverlat hopes cutting rates on consumer loans to below 20% will boost demand for car loans and mortgages by up to 25%. Although it has only a 5% market share, it has set aside more than 1 billion pesos (110 million dollars) for mortgages and a further 850 million pesos for car loans. The bank is reportedly considering an offer for Grupo Financiero Banorte, which in turn has expressed interest in buying Grupo Financiero Bancrecer.


BANK SOLD FOR 12.5 BILLION DOLLARS

Mexico's largest financial services group is BBVA-Bancomer, controlled since last year by Spain's Banco Bilbao Vizcaya Argentaria. Another Spanish bank, Banco Santander Central Hispano, controls Serfin bank, the nation's third largest banking corporation. Now, U.S. giant Citigroup Inc., which has a presence in 102 countries, has offered 12.5 billion dollars for Grupo Financiero Banamex-Accival, the nation's second largest banking group. Banamex (Banco Nacional de México) is the oldest full-service bank in Mexico, having been founded in June, 1884. Until the Central Bank, Banco de México (Banxico), was established in the 1920s, Banamex was the principal issuer of the nation's paper currency.

Today, the bank, which has 30 billion dollars in assets, serves about 26.4% of the market, and some 5 million clients, via a network of 1,300 branches and 5,000 ATMs throughout the country. The Citigroup transaction, which would be the largest in Latin American banking history, is still subject to regulatory approval. While some Mexican opposition politicians are opposed to the purchase on the grounds that it allows foreign investors to dominate the banking sector, financial analysts believe it will greatly strengthen both the banking sector and also the national economy. The purchase will vault Citigroup into a commanding lead in the fast-growing Hispanic market throughout North America. The "Banamex" name will still be used.


BIO-PIRACY

Only hours before a new corn (maize) patent filed by the U.S. firm Dupont was due to come into force in Europe last month, the Agriculture Secretariat filed a formal complaint to the European Patent Office (EPO). For once, the government finds itself supported by Greenpeace and other environmental groups, as well as by numerous farmers' organizations calling for the patent application to be rejected. Corn is thought to have originated in Mexico and many locally grown corn crops are rich in oils. The composition of the variety of corn that Dupont has applied to patent contains 6% fats and 55% oleic acids. This matches many varieties of corn currently grown in Mexico.

Environmentalists have described the Dupont application as "bio-piracy". If its application was successful, the company would have a monopoly over oil-rich corn and many national corn producers might find themselves having to pay annual royalties to Dupont just in order to continue growing the same varieties of corn they have grown without any restrictions for years.


ING BUYS INSURANCE GROUP

The Dutch company ING will soon control Mexico's largest insurance company, Seguros Comercial América. Seguros Comercial América has grown rapidly, seeing its market share increase from around 8% back in 1989 to 29% last year. ING already owns a 41.5% stake in the insurance company and is now buying a further 45.2% from Mexican conglomerate Savia for 791 million dollars. Market investors hold the remaining 13.3% of Seguros Comercial América. ING, based in Amsterdam, employs 100,000 workers in 65 countries.

The firm is a world leader in "no-branch" on-line and telephone banking and insurance services. The acquisition of Seguros Comercial América provides ING with a solid platform for further expansion and industry analysts expect that ING may try to consolidate its position by making an offer for Aseguradora Hidalgo, an insurer which currently holds 23% of the market.


THE SOFT DRINKS INDUSTRY - A SPECIAL REPORT

THE DOMINANCE OF COCA-COLA

The leader in the soft drinks sector, not surprisingly, is Coca-Cola, whose brands also include Sprite, Fanta, Fresca and Ciel bottled water. Mexican sales account for 10% of the volume of all Coca-Cola sales worldwide. The supply and distribution of Coca-Cola products comes from 17 different bottling companies, which operate a combined total of 87 plants. They supply 900,000 points of sale, and generate 75,000 direct jobs and an estimated 300,000 additional "indirect" jobs in such industries as sugar, vehicles, tires, glass, plastic and steel.

LARGEST CONSUMERS PER CAPITA

Mexico overtook the U.S. a few years ago to lead the world as regards per capita consumption of Coca-Cola products. A staggering 459 eight-ounce bottles were imbibed last year for every man, woman and child in the country. Some regions are larger consumers than others. For example, the Yucatan Peninsula's hot climate and huge tourist industry contribute to its per capita consumption of more than 550 bottles a year.

CONSOLIDATION AMONG COCA-COLA BOTTLERS

Consolidation is the key word in the soft drinks industry. The anchor bottler is Coca-Cola Femsa (KOF), followed by Panamerican Beverages, Grupo Continental, Embotelladoras Argos and several smaller family-run firms. A controlling share (51%) of KOF is held by Fomento Económico Mexicano (Femsa) with U.S.-based Coca-Cola holding 30%. The remaining 19% is traded on the open market. KOF's long-held dominance in the fragmented distribution system is likely to be challenged in the next few years. First, Grupo Continental bought a smaller competitor, Embotelladora de Tecomán, last year for around 42.7 million dollars.

Now, Embotelladoras Argos, the fifth largest bottler, is merging with Proyección Corporativa and Empresas El Carmen. The new company will immediately become the second largest bottling company in Mexico with 22 bottling plants, principally in the northern states of Chihuahua, Sonora, Sinaloa, Baja California Sur, Nuevo León, Tamaulipas and Coahuila. It expects to sell 440 million cases of 24 eight-ounce bottles a year. By way of comparison, KOF reported sales of 582 million cases last year.

PEPSICO DISTRIBUTORS CONSOLIDATE, TOO

The consolidation of Coca-Cola's fragmented distribution system has been predicted by industry analysts for some time and parallels a similar consolidation among Pepsi-Cola bottlers. PepsiCo now has 8 bottlers sharing annual sales of around 200 million dollars, equivalent to about 25-30% of the market for Coca-Cola. PepsiCo products include 7-Up, Squirt and Electropura bottled water. Last year, the leading PepsiCo bottler, Pepsi-Gemex, which accounts for 65% of all PepsiCo sales in Mexico, paid 81 million dollars to acquire Embotelladoras del Valle de Anáhuac. The company had earlier bought Grupo Embotellador del Noreste, based in Monterrey. Pepsi-Gemex is controlled by Consorcio Industrial Escorpión, which also owns 10 sugar mills and is responsible for 22% of national sugar production, including 60% of all refined sugar.

SWEETENED WITH FRUCTOSE OR SUGAR

Another of the significant changes in the soft drinks industry is that high-fructose corn syrup is rapidly displacing sugar as the bottling companies' preferred sweetener. Traditionally, sugar has been a key ingredient in soft drinks with many manufacturers guaranteeing their sugar supplies by owning their own sugar factories.

Grupo Continental, for example, purchased two sugar refineries in 1988 in the states of Oaxaca and Veracruz on its way to becoming Mexico's third largest producer of refined sugar, supplying 15% of the total market.

But times change and Continental now wants out of the sugar business. While Mexico is self-sufficient as regards sugar and remains the world's eighth-largest producer, sugar refineries are heavily in debt and potentially lucrative exports to the U.S. market are mired in an on-going trade dispute. Fructose is also the subject of a trade dispute.

Until relatively recently, all fructose used in Mexico was imported from the U.S.. Even now, domestic producers, such as Arancia Corn Products, based in Jalisco with plants also in Querétaro and the State of Mexico, supply only about 300,000 of the 1.8 million metric tons of fructose used each year. Many soft drinks manufacturers are replacing sugar by fructose, which is found abundantly in nature in everything from fruit juices to honey, because it is transparent and up to 1.8 times sweeter, gram for gram.(End of Special Report)


REDUCED INFLATION

The latest figures from the central bank, Banxico, show that the Consumer Price Index (Indice Nacional de Precios al Consumidor, INPC) increased by only 0.23% during May, the lowest figure for that month since 1972. The annual rate, from May 2000 to May this year, is down to 6.95%, well in line with Banxico's projected target figure of 6.5% for this calendar year. Inflation was higher than average in Tampico (1.02%), Tlaxcala (0.76%), Mexico City (0.75%) and Toluca (0.71%), while the index fell by more than 1% in the northern cities of Hermosillo, Monclova, Monterrey, Matamoros, Mexicali and Culiacán.


GRAPE COMPLAINT REJECTED

The International Trade Commission (ITC) has rejected an anti-dumping complaint filed by a group of grape growers from the Cochella Valley in California against imports of Mexican-grown table grapes. Sonora is the principal table grape producing state in Mexico and grape exports to the U.S. are worth about 140 million dollars a year. During the three month period between April 1 and June 30, the state exports 85% of its harvest, at prices ranging from 30 dollars a case for early spring grapes in April to 10 dollars a case in June. In total, the Sonora grape harvest fills 15 million cases. Grapes are also exported to several European and Middle Eastern countries.


INCREASED FOREIGN INVESTMENT

Despite concerns over the slow-down in the U.S. economy and about whether the peso has become overvalued against the dollar, the international investment community is extremely positive about the long term strengths of the Mexican economy. Even before Citigroup's announcement of a 12.5 billion dollar bid for Grupo Banamex-Accival, foreign investment was sharply up on last year. In the first quarter, Mexico received 3.6 billion dollars in direct foreign investment, 17% more than for the same period in 2000.


NEW AIRLINE TAKES TO THE SKIES

A new airline, Líneas Aéreas Azteca (LAA), is now providing daily service on its inaugural routes from Zacatecas and Mexico City to Tijuana. In the near future, LAA is expected to add Tijuana-bound flights from several other major cities, including Guadalajara, Uruapan and Morelia. Businessman Leonardo Sánchez Avalos who built his personal fortune by amassing one of Mexico's largest fleets of petroleum transporting vehicles owns the airline. LAA is leasing brand-new Boeing 738-700s, expanding its fleet as quickly as it opens new routes. Within the next twelve months LAA will probably fly several routes that were formerly flown by now-defunct TAESA, including Tijuana-León and connections between Mexico City and Torreón, Hermosillo, and Chihuahua. LAA hopes to move 450,000 passengers during its first year and 7.4 million passengers during its fifth full year of operation.


ANOTHER MILESTONE FOR LLOYD FUNDS

Last month, Mexico's leading independent mutual fund management company, Operadora de Fondos Lloyd, surpassed yet another milestone. Lloyd announced that its family of funds now serves more than 100,000 clients, administering more than 750 million dollars (8 billion pesos) on their behalf. This means that Lloyd continues to attract more accounts, and more foreign investment, than any other mutual fund provider, even including the major banks.

Mirrored with permission from Lloyd S.A. de C.V.
See their Page on Mexico Connect.

2001 Operadora de Fondos Lloyd, S.A.
© 2001 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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